[Federal Register: June 1, 2009 (Volume 74, Number 103)]
[Rules and Regulations]
[Page 26077-26081]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jn09-1]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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[[Page 26077]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1356]
Capital Adequacy Guidelines; Small Bank Holding Company Policy
Statement: Treatment of Subordinated Securities Issued to the United
States Treasury Under the Emergency Economic Stabilization Act of 2008
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for public comment.
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SUMMARY: The Board has adopted, and is seeking public comment on an
interim final rule (interim final rule or rule) to support in a timely
manner, the full implementation and acceptance of the capital purchase
program of the U.S. Department of Treasury (Treasury) and promote the
stability of banking organizations and the financial system. This rule
permits bank holding companies that have made a valid election to be
taxed under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code
(S-Corp BHCs) and bank holding companies organized in mutual form
(Mutual BHCs) to include the full amount of any new subordinated debt
securities issued to the Treasury under the capital purchase program
announced by the Secretary of the Treasury on October 14, 2008
(Subordinated Securities) in tier 1 capital for purposes of the Board's
risk-based and leverage capital guidelines for bank holding companies,
provided that the Subordinated Securities will count toward the limit
on the amount of other restricted core capital elements includable in
tier 1 capital; and allows bank holding companies that are subject to
the Board's Small Bank Holding Company Policy Statement and that are S-
Corps or Mutual BHCs to exclude the Subordinated Securities from
treatment as debt for purposes of the debt-to-equity standard under the
Small Bank Holding Company Policy Statement.
DATES: The interim final rule will become effective on June 1, 2009.
Comments must be received by July 1, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1356, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at http://
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper form in Room MP-
500 of the Board's Martin Building (20th and C Street, NW.) between 9
a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director,
(202) 452-2402, John F. Connolly, Manager, (202) 452-3621, or Michael
J. Sexton, Manager, (202) 452-3009, Division of Banking Supervision and
Regulation; or Kieran J. Fallon, Assistant General Counsel, (202) 452-
5270, April C. Snyder, Counsel, (202) 452-3099, or Benjamin W.
McDonough, Senior Attorney, (202) 452-2036, Legal Division; Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Ave., NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION:
Capital Guidelines
On October 3, 2008, President Bush signed into law the Emergency
Economic Stabilization Act of 2008 (EESA), Division A of Public Law No.
110-343, 122 Stat. 3765 (2008). Pursuant to the authorities granted by
the EESA, and in order to restore liquidity and stability to the
financial system, on October 14, 2008, the Secretary of the Treasury
announced a program within the Troubled Asset Relief Program (TARP)
established by section 101 of the EESA to provide capital to eligible
banks, bank holding companies and savings associations (collectively,
banking organizations), as well as certain other financial institutions
(the Capital Purchase Program or CPP).
As of April 20, 2009, Treasury had invested approximately $198
billion under the CPP in newly issued senior perpetual preferred stock
of banking organizations (Senior Perpetual Preferred Stock) that are
not S-Corps or organized in mutual form. In order to support the CPP
and promote the stability of banking organizations and the financial
system through Treasury's investments in Senior Perpetual Preferred
Stock, the Board published an interim final rule on October 22, 2008
(October interim final rule) permitting bank holding companies that
issued Senior Perpetual Preferred Stock to the Treasury under the CPP
to include all of the Senior Perpetual Preferred Stock in their tier 1
capital without limit. The Board today published a final rule on the
capital treatment of the Senior Perpetual Preferred Stock substantially
identical to the October interim final rule.\1\
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\1\ Published elsewhere in today's issue.
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Since the time that Treasury announced the terms of the Senior
Perpetual Preferred Stock, Treasury has worked towards developing terms
under which banking organizations organized as S-Corps or in mutual
form could participate in the Capital Purchase Program. This is
consistent with the goal of the CPP, which is to promote financial
stability by offering capital support to all viable banking
organizations regardless of their form of organization.
S-Corp BHCs generally may not participate in the CPP through the
issuance of Senior Perpetual Preferred
[[Page 26078]]
Stock because, under the Internal Revenue Code, S-Corps may not issue
more than one class of equity security. Bank holding companies
organized in mutual form also cannot issue Senior Perpetual Preferred
Stock because of their mutual ownership structure.
On January 14, 2009, Treasury announced the terms under which it
will purchase newly-issued subordinated debt securities from S-Corps
under the Capital Purchase Program. These terms are designed to
facilitate S-Corp participation in the CPP in a manner that is as
economically comparable as possible, consistent with the legal
structure of S-Corp BHCs, the Board's capital adequacy guidelines, and
the Internal Revenue Code, to institutions that have issued Senior
Perpetual Preferred Stock. In particular, Treasury will purchase from
S-Corps that are eligible to participate in the CPP subordinated debt
securities that rank senior to common stock but that are subordinated
to the claims of depositors and other creditors (Subordinated
Securities), unless such other claims are explicitly made pari passu or
subordinated to the Subordinated Securities.\2\
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\2\ On April 7, 2009, the Treasury announced a term sheet for
top-tier Mutual BHCs under which these banking organizations issue
subordinated debt to Treasury under the CPP on substantially the
same terms as S-Corp BHCs. This interim final rule also accords the
same capital treatment to Subordinated Securities issued by Mutual
BHCs as those issued by S-Corp BHCs, and accordingly, any reference
to a S-Corp BHC in the notice shall also be deemed to include a
Mutual BHC unless the context otherwise requires.
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As with other CPP participants, the aggregate amount of
Subordinated Securities that may be issued by an S-Corp to Treasury
must be (i) not less than one percent of the S-Corp's risk-weighted
assets, and (ii) not more than the lesser of (A) $25 billion and (B)
three percent of its risk-weighted assets.\3\ In connection with its
purchase of the Subordinated Securities, the Treasury also will receive
warrants to purchase, upon net settlement, a number of additional
Subordinated Securities in an amount equal to 5 percent of the amount
of Subordinated Securities purchased on the date of investment.
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\3\ Treasury has announced that it is considering re-opening the
Capital Purchase Program for institutions with total assets under
$500 million and raising--from 3 percent to 5 percent of risk-
weighted assets--the amount of capital instruments for which
qualifying institutions can apply.
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Similar to the Senior Perpetual Preferred Stock, Subordinated
Securities issued pursuant to the CPP must include certain features
designed to make them attractive to a wide array of generally sound S-
Corp banking organizations and to encourage such companies to replace
such securities with private capital once the financial markets return
to more normal conditions. In particular, the Subordinated Securities
will bear an initial interest rate of 7.7 percent per annum, which will
increase to 13.8 percent per annum five years after issuance.\4\ An S-
Corp issuer may redeem the Subordinated Securities at 100 percent of
their issuance price, plus accrued and unpaid interest. In all cases,
Treasury must consult with the appropriate Federal banking agency
before a banking organization may redeem the Subordinated
Securities.\5\ In addition, following the redemption of all outstanding
Subordinated Securities, an S-Corp issuer shall have the right to
repurchase any warrants for additional Subordinated Securities held by
Treasury.
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\4\ The interest payments on the Subordinated Securities will be
tax deductible for shareholders of the issuing S-Corp and therefore
this interest rate is economically comparable (assuming a 35 percent
marginal tax rate) to the dividend payments on the Senior Preferred
Stock, which are not tax deductible.
\5\ See section 7001 of the American Recovery and Reinvestment
Act of 2009, Public Law No. 111-5, 123 Stat. 115.
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Under the Board's current risk-based and leverage capital adequacy
guidelines for bank holding companies (Capital Guidelines),\6\ the
Subordinated Securities would be ineligible for tier 1 capital
treatment because they are subordinated debt, but would be eligible for
inclusion in tier 2 capital.\7\ However, the Subordinated Securities
were purposefully structured to have features that are very close to
those of the subordinated notes underlying trust preferred securities
that qualify for tier 1 capital as a restricted core capital element
for bank holding companies (qualifying trust preferred securities).
Like such junior subordinated notes, the Subordinated Securities would
be deeply subordinated and junior to the claims of depositors and other
creditors of the issuing bank holding company. Furthermore, as required
of the junior subordinated notes underlying qualifying trust preferred
securities, interest payable on the Subordinated Securities may be
deferred by the issuing S-Corp BHC for up to 20 quarters without
creating an event of default. Principal and accrued interest on such
securities would only become due and payable if interest is deferred
more than 20 quarters or if the issuing S-Corp BHC enters bankruptcy,
is liquidated, or if one or more of its major bank subsidiaries is put
into receivership. Additionally, under the terms of the Capital
Purchase Program, the Subordinated Securities have a maturity of 30
years, which is the same minimum term required for such junior
subordinated notes.\8\
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\6\ 12 CFR part 225, Appendices A and D.
\7\ See 12 CFR part 225, Appendix A, sections II.A.2. and
II.A.2.d.
\8\ 12 CFR part 225, Appendix A, section II.A.1.c.iv.
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In addition, like the Senior Perpetual Preferred Stock, the
Subordinated Securities will be issued to Treasury as part of a
nationwide program, established by Treasury under the EESA, to provide
capital to eligible banking organizations that are in generally sound
financial condition in order to increase the capital available to
banking organizations and thereby promote stability in the financial
markets and the banking industry as a whole.\9\ Treasury will purchase
these Subordinated Securities under special powers granted by Congress
to the Secretary of the Treasury in the EESA to achieve these important
public policy objectives. In addition, the terms of the Subordinated
Securities issued under the CPP provide that redemption is subject to
the approval of the Federal Reserve.\10\ In light of this provision,
the Board recently specified in Federal Reserve SR letter 09-4 \11\
that any bank holding company that intends to redeem Subordinated
Securities issued to Treasury under the CPP should first consult with
Federal Reserve supervisory staff. After reviewing a request by a bank
holding company to redeem Subordinated Securities, the Board may take
such actions as are necessary or appropriate to restrict the bank
holding company from redeeming such securities if the redemption would
be inconsistent with the safety and soundness of the bank holding
company.\12\ Each of these factors, and the features of the
Subordinated Securities that are comparable to those of qualifying
trust preferred securities, is important to the determinations made by
the Board with respect to the appropriate regulatory capital treatment
of the Subordinated Securities.
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\9\ This interim final rule addresses only the regulatory
capital treatment of Subordinated Securities. Details about the CPP,
including eligibility requirements and the general terms and
conditions of the Subordinated Securities and warrants associated
with such securities, are available at http://
www.financialstability.gov.
\10\ See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2).
\11\ SR 09-4, ``Applying Supervisory Guidance and Regulations on
the Payment of Dividends, Stock Redemptions, and Stock Repurchases
at Bank Holding Companies,'' March 27, 2009.
\12\ See 12 CFR part 225, Appendix A, sections II.(iii) and
II.A.1.c.ii.(2).
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For these reasons and in order to support the participation of S-
Corp
[[Page 26079]]
BHCs in the Capital Purchase Program, promote the stability of banking
organizations and the financial system, and help banking organizations
meet the credit needs of creditworthy customers, the Board has adopted
this interim final rule to permit S-Corp BHCs that issue new
Subordinated Securities to the Treasury under the TARP to include the
full amount of such securities in tier 1 capital for purposes of the
Board's Capital Guidelines.\13\
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\13\ See 12 CFR part 225, Appendices A and D.
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The Board is allowing the full amount of the Subordinated
Securities to count in tier 1 capital to provide similar regulatory
capital treatment to the instruments issued by S-Corp BHCs and other
bank holding companies under the Capital Purchase Program and in light
of the special and unique public policy objectives of the CPP. However,
the interim final rule requires an S-Corp BHC to take into account the
amount of Subordinated Securities in determining the amount of other
restricted core capital elements the company may include in its tier 1
capital.\14\ Thus, for example, if the amount of Subordinated
Securities issued by an S-Corp BHC equals or exceeds 25 percent of the
company's tier 1 capital elements, the company may not include any
other currently outstanding or future restricted core capital elements
in tier 1 capital, and any such restricted core capital elements in the
company's tier 1 capital elements could only be included in tier 2
capital. This approach is designed to give the Subordinated Securities
tier 1 treatment that is equivalent to that provided Senior Perpetual
Preferred Stock, while preventing a S-Corp BHC's tier 1 capital from
becoming dominated by instruments that are, or have features similar
to, restricted core capital elements. The following examples provide an
explanation of how this computation will operate; each example assumes
that the bank holding company's limit on inclusion of restricted core
capital elements in tier 1 capital is $25 million.
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\14\ 12 CFR part 225, Appendix A, section II.A.1.b.
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Example 1. The bank holding company has no existing
restricted core capital elements and issues $30 million of Subordinated
Securities to the Treasury. The bank holding company may include the
full $30 million in tier 1 capital, but may not include any additional
restricted core capital elements that it issues in tier 1 capital
unless its limit expands.
Example 2. The bank holding company has $10 million of
previously issued trust preferred securities included in tier 1 capital
and issues $30 million of Subordinated Securities. The $30 million of
Subordinated Securities is includable in tier 1 capital, and the $10
million of trust preferred securities is includable in tier 2 capital.
The bank holding company may not include the trust preferred securities
in tier 1 capital, because the $30 million of Subordinated Securities
exceeds the bank holding company's $25 million limit on inclusion of
restricted core capital elements in tier 1 capital.
Example 3. The bank holding company has no restricted core
capital elements and issues $20 million of Subordinated Securities to
Treasury. The $20 million of Subordinated Securities is includable in
tier 1 capital, and the bank holding company may issue an additional $5
million of other restricted core capital elements (e.g., trust
preferred securities or cumulative perpetual preferred securities) and
include them in its tier 1 capital.
The Board expects S-Corp BHCs that issue Subordinated Securities, like
all other bank holding companies, to hold capital commensurate with the
level and nature of the risks to which they are exposed. In addition,
the Board expects banking organizations that issue Subordinated
Securities to appropriately incorporate the obligations of the
Subordinated Securities into the organization's liquidity and capital
funding plans.
The Board notes that, as a matter of prudential policy and
practice, it generally has not allowed subordinated debt to be included
in tier 1 capital. Furthermore, the Board has restricted the amount of
qualifying trust preferred securities that may be included in core
capital, along with other restricted core capital elements, to an
aggregate total that may not exceed 25 percent of the sum of all core
capital elements, including restricted core capital elements (which
will be computed net of goodwill less any associated deferred tax
liability as of March 31, 2011).\15\ The Board has long expressed
concern about banking organizations including debt instruments of any
kind in tier 1 capital given the contractual obligations they place on
the issuing banking organization and consequent limited ability to
absorb losses. The Board also expressed concerns with the inclusion in
tier 1 capital of instruments that provide for a step-up in dividend or
coupon rates.\16\ In light of these concerns, the Board previously has
declined to allow subordinated debt to be included in tier 1 capital
and has restricted the amount of qualifying trust preferred securities
that may be included in tier 1 capital. The Board remains concerned
that instruments with debt or debt-like features have limited ability
to absorb losses.
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\15\ See 74 FR 12076 (March 23, 2009).
\16\ For example, in a 1992 policy statement on subordinated
debt, the Board noted: ``Although payments on debt whose rates
increase over time on the surface may not appear to be directly
linked to the financial condition of the issuing organization, such
debt (sometimes referred to as expanding or exploding rate debt) has
a strong potential to be credit sensitive in substance.
Organizations whose financial condition has strengthened are more
likely to be able to refinance the debt at a rate lower than that
mandated by the preset increase, whereas institutions whose
condition has deteriorated are less likely to be able to do so.
Moreover, just when these latter institutions would be in the most
need of conserving capital, they would be under strong pressure to
redeem the debt as an alternative to paying higher rates and, thus,
would accelerate depletion of their resources.'' See 12 CFR Sec.
250.166(b)(4) at n. 4. Furthermore, the Board has not permitted bank
holding companies to include capital instruments in tier 1 capital
if they include dividend rate step-ups.
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However, as discussed above, issuance of the Subordinated
Securities is consistent with a strong public policy objective, which
is to increase the capital available to banking organizations generally
in the current environment and thereby promote stability in the
financial markets and the banking industry as a whole and facilitate
the ability of banking organizations to meet the needs of creditworthy
households, businesses, and other customers. In addition, the Board
notes that other terms and public policy considerations related to the
Subordinated Securities mitigate supervisory concerns. As with
qualifying trust preferred securities, the Subordinated Securities
allow the issuing bank holding company to defer interest payments for
five years. Furthermore, under the terms of the CPP, issuers of this
instrument generally will not be allowed to repurchase equity
securities or trust preferred securities for ten years after the
issuance of the Subordinated Securities or increase common dividends
for three years after issuance without the consent of the Treasury.
These restrictions promote in an important way the overall safety and
soundness of the issuer. Moreover, as previously discussed, Treasury
must consult with the Board before an S-Corp BHC may redeem the
Subordinated Securities. These features, viewed in light of the unique,
temporary, and extraordinary nature of the CPP, countervail in many
respects the Board's concerns with regard to the subordinated debt
nature of the securities. As previously noted, the Board also would
retain general
[[Page 26080]]
supervisory authority with respect to any S-Corp BHC.
In light of the instrument- and circumstances-specific nature of
the Board's determination, the Board strongly cautions bank holding
companies against construing the inclusion of the Subordinated
Securities in tier 1 capital as in any way detracting from the Board's
longstanding stance regarding the unacceptability of including other
forms of subordinated debt in tier 1 capital.
Small Bank Holding Company Policy Statement
In order to maintain competitive equality between large and small
bank holding companies, the Board also is amending its Small Bank
Holding Policy Statement (Policy Statement) to allow bank holding
companies that are subject to the Policy Statement and that are S-Corp
BHCs to exclude the Subordinated Securities from debt for purposes of
the Policy Statement.\17\ Generally, bank holding companies with less
than $500 million in consolidated assets (small bank holding companies)
are not subject to the Capital Guidelines and instead are subject to
the Policy Statement. The Policy Statement limits the ability of a
small bank holding company to pay dividends if its debt-to-equity ratio
exceeds certain limits. However, the Policy Statement currently
provides that small bank holding companies may exclude from debt an
amount of subordinated debt associated with qualifying trust preferred
securities up to 25 percent of the bank holding company's equity (as
defined in the Policy Statement), less goodwill on the parent company's
balance sheet, in determining compliance with the requirements of
certain provisions of the Policy Statement.\18\ The practical effect of
excluding the Subordinated Securities from debt for purposes of the
Policy Statement is to allow issuance of Subordinated Securities by
small bank holding companies without exceeding the debt-to-equity ratio
standard that would disallow the payment of dividends by such small
bank holding companies. In turn, this allows small bank holding
companies that issue Subordinated Securities to downstream Treasury's
investment in the form of the Subordinated Securities as additional
common stock to subsidiary depository institutions (that counts as tier
1 capital of the depository institutions) and to pay dividends to the
small bank holding company's shareholders to the extent appropriate and
permitted by the Federal Reserve.
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\17\ 12 CFR part 225, Appendix C.
\18\ 12 CFR part 225, Appendix C, section 2, n. 3.
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Because, as previously discussed, the Subordinated Securities and
the junior subordinated notes underlying qualifying trust preferred
securities have very similar features, and to facilitate the
participation of small bank holding companies in the Capital Purchase
Program, the Board has adopted this interim final rule to allow small
bank holding companies that are S-Corp BHCs to exclude the Subordinated
Securities from the definition of debt for purposes of the debt-to-
equity ratio standard under the Policy Statement. The factors and
considerations discussed above apply equally to the Board's decision to
modify the Policy Statement in this manner.
The Board solicits comments on all aspects of the rule.
Administrative Procedure Act
Pursuant to sections 553(b) and (d) of the Administrative Procedure
Act (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause
for issuing this interim final rule and making the rule effective on
June 1, 2009, and that it is impracticable, unnecessary, or contrary to
the public interest to issue a notice of proposed rulemaking and
provide an opportunity to comment before the effective date. The Board
has adopted the rule in light of, and to help address, the continuing
unusual and exigent circumstances in the financial markets. The rule
will allow S-Corp BHCs to immediately include the full amount of
Subordinated Securities they issue to Treasury under the CPP in tier 1
capital. This will help promote stability in the banking system and
financial markets. The rule also will allow small bank holding
companies that are S-Corp BHCs to exclude the Subordinated Securities
from the definition of debt for purposes of the debt-to-equity ratio
standard of the Policy Statement.
The Board believes it is important to provide S-Corp BHCs
immediately with guidance concerning the capital treatment of the
Subordinated Securities so that they may make appropriate judgments
concerning the extent of their participation in the CPP and to provide
S-Corp BHCs with immediate certainty concerning the regulatory capital
treatment of the Subordinated Securities for capital planning purposes.
(Treasury recently completed the documentation for issuances of the
Subordinated Securities by S-Corp BHCs.) The Board is soliciting
comment on all aspects of the rule and will make such changes that it
considers appropriate or necessary after review of any comments
received.
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that an agency prepare and make available for public
comment an initial regulatory flexibility analysis in connection with a
notice of proposed rulemaking.\19\ Under regulations issued by the
Small Business Administration,\20\ a small entity includes a bank
holding company with assets of $175 million or less (a small bank
holding company). As of December 31, 2008, there were approximately
2,586 small bank holding companies.
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\19\ See 5 U.S.C. 603(a).
\20\ See 13 CFR 121.201.
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As a general matter, the Capital Guidelines apply only to a bank
holding company that has consolidated assets of $500 million or more.
Therefore, the changes to the Capital Guidelines will not affect small
bank holding companies. In addition, the rule would reduce burden and
benefit small bank holding companies by allowing them to exclude the
Subordinated Securities from treatment as debt for purposes of the
debt-to-equity standard under the Policy Statement. This treatment is
similar to the current treatment of junior subordinated notes
underlying trust preferred securities under the Policy Statement.
Furthermore, the Board estimates that the changes to the Policy
Statement will affect less than one percent of small bank holding
companies. Accordingly, the Board certifies that this interim final
rule does not have a significant impact on a substantial number of
small bank holding companies.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the Board has reviewed the interim final rule
to assess any information collections. There are no collections of
information as defined by the Paperwork Reduction Act in the interim
final rule.
Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law No. 106-102,
requires the Federal banking agencies to use plain language in all
proposed and final rules published after January 1, 2000. The Board
invites comment on how to make the interim final rule easier to
understand. For example:
Have we organized the material to suit your needs? If not,
how could the rule be more clearly stated?
[[Page 26081]]
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons stated in the preamble, the Board of Governors of the
Federal Reserve System amends part 225 of chapter II of title 12 of the
Code of Federal Regulations as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
2. Appendix A to part 225 is amended as set forth below:
0
a. In section II.A.1.a.iv., remove ``and'' from the end of paragraph
(3), remove the period from the end of paragraph (4), add a semicolon
and ``and'' to the end of subparagraph (4), and add a new paragraph (5)
to read as follows; and
0
b. In section II.A.1.b.i., amend paragraph (1) by adding the following
sentence to the end of paragraph (1) to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
II. * * *
A. * * *
1. * * *
a. * * *
iv. * * *
(5) Subordinated debentures issued to the Treasury under the
TARP (TARP Subordinated Securities) established by the EESA by a
bank holding company that has made a valid election to be taxed
under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code
(S-Corp BHC) or by a bank holding company organized in mutual form
(Mutual BHC).
b. * * *
i. * * *
(1) * * * Notwithstanding the foregoing, the full amount of TARP
Subordinated Securities issued by an S-Corp BHC or Mutual BHC may be
included in its tier 1 capital, provided that the banking
organization must include the TARP Subordinated Securities in
restricted core capital elements for the purposes of determining the
aggregate amount of other restricted core capital elements that may
be included in tier 1 capital in accordance with this section.
* * * * *
0
3. In appendix C to part 225, revise footnote 3 in section 2 to read as
follows:
Appendix C to Part 225--Small Bank Holding Company Policy Statement
* * * * *
2. * * *
\3\ The term debt, as used in the ratio of debt to equity, means
any borrowed funds (exclusive of short-term borrowings that arise
out of current transactions, the proceeds of which are used for
current transactions), and any securities issued by, or obligations
of, the holding company that are the functional equivalent of
borrowed funds.
Subordinated debt associated with trust preferred securities
generally would be treated as debt for purposes of paragraphs 2.C.,
3.A., 4.A.i., and 4.B.i. of this policy statement. A bank holding
company, however, may exclude from debt an amount of subordinated
debt associated with trust preferred securities up to 25 percent of
the holding company's equity (as defined below) less goodwill on the
parent company's balance sheet in determining compliance with the
requirements of such paragraphs of the policy statement. In
addition, a bank holding company subject to this policy statement
that has not issued subordinated debt associated with a new issuance
of trust preferred securities after December 31, 2005, may exclude
from debt any subordinated debt associated with trust preferred
securities until December 31, 2010. Bank holding companies subject
to this policy statement also may exclude from debt until December
31, 2010, any subordinated debt associated with refinanced issuances
of trust preferred securities originally issued on or prior to
December 31, 2005, provided that the refinancing does not increase
the bank holding company's outstanding amount of subordinated debt.
Subordinated debt associated with trust preferred securities will
not be included as debt in determining compliance with any other
requirements of this policy statement.
In addition, notwithstanding any other provision of this policy
statement and for purposes of compliance with paragraphs 2.C., 3.A.,
4.A.i., and 4.B.i. of this policy statement, both a bank holding
company that is organized in mutual form and a bank holding company
that has made a valid election to be taxed under Subchapter S of
Chapter 1 of the U.S. Internal Revenue Code may exclude from debt
subordinated debentures issued to the United States Department of
the Treasury under the Troubled Asset Relief Program established by
the Emergency Economic Stabilization Act of 2008, Division A of Pub.
L. No. 110-343, 122 Stat. 3765 (2008).
The term equity, as used in the ratio of debt to equity, means
the total stockholders' equity of the bank holding company as
defined in accordance with generally accepted accounting principles.
In determining the total amount of stockholders' equity, the bank
holding company should account for its investments in the common
stock of subsidiaries by the equity method of accounting.
Ordinarily the Board does not view redeemable preferred stock as
a substitute for common stock in a small bank holding company.
Nevertheless, to a limited degree and under certain circumstances,
the Board will consider redeemable preferred stock as equity in the
capital accounts of the holding company if the following conditions
are met: (1) The preferred stock is redeemable only at the option of
the issuer; and (2) the debt to equity ratio of the holding company
would be at or remain below .30:1 following the redemption or
retirement of any preferred stock. Preferred stock that is
convertible into common stock of the holding company may be treated
as equity.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, May 21, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E9-12626 Filed 5-29-09; 8:45 am]
BILLING CODE 6210-02-P